No real estate for old men

Real estate may be off limits to Polish pension funds, but foreign funds have invested in projects such as Galeria Kaskada in Szczecin
Image : ECE Projektmanagement

Poland is one of few countries where pension funds cannot invest in real estate directly, much to the chagrin of their managers, and pensioners

by Beata Socha

All over the world pension funds look for safe and stable forms of investment. Despite real estate taking a plunge in many parts of the world, it is still far safer than the stock exchange. And with record low interest rates both in Poland and the EU, real estate is a pretty lucrative opportunity compared to treasury bonds, which soon will also be off limits for Polish pension funds (OFEs) anyway.

around the worldJapanese pension funds, for instance, now account for 14 percent of over ¥10 trillion (roughly $96 billion) in private real estate funds, a marked increase from 4.8 percent in 2006, according to data by Japan’s Association for Real Estate Securitization.

As many as 43 percent of Japanese pension funds have some real estate involvement, compared to 31 percent in 2009, according to another ARES survey.

Many European pension funds have also taken to real estate, particularly in Finland and Portugal, where pension funds’ direct investment in the real estate market is at 11 percent and 12.2 percent respectively, according to data from Lion’s Bank.

A strong asset

Even though in the trough of the crisis it seemed that the Polish real estate market might go underwater, it managed to get through relatively unscathed. The Warsaw Stock Exchange’s bluechip WIG 20 index dropped by over 66 percent between October 2007 and February 2009, when it started to recover some of that loss. Meanwhile, residential real estate, which was hit the hardest among real estate segments, devalued by 27 percent in its five-year period of decline in 2008-2013.

Commercial real estate is even more attractive for major long-term investors. According to data from Knight Frank, the expected yields in Poland’s office segment has decreased from 7.25 percent in 2009 to 6 percent. This change, with all other conditions unchanged, makes the real value of Warsaw office schemes some 21 percent higher than five years ago, according to Lion’s Bank analysts.

Up for grabs

around the oecdUnsurprisingly, European and US real estate funds, with high pension fund involvement, have been actively pursuing Polish real estate for years.
The ECE group holds several retail schemes in its portfolio, including Galeria Bałtycka in Gdańsk, Galeria Krakowska in Kraków and Galeria Kaskada in Szczecin.

British Resolution Property, originally founded in 1998 and backed by pension funds, private equity investors and major US foundations, is also looking for returns in the Polish real estate market. In 2010 it purchased Galeria Pomorska in Bydgoszcz, a 20,000-sqm scheme, for €50.75 million. In 2013 the fund launched construction on a 10,000-sqm extension with €55.8 million financing from pbb Deutsche Pfandbriefbank.

Indirect investment

With so much working in favor of Polish real estate, why are Polish pension funds not pursuing it? The answer is simple – they can’t. Polish law, which regulates their scope of investment, does not allow them to invest in real estate directly.

The reason for this is probably not ill will, but simple oversight. “If you introduce laws on OFEs in such a hurry, it’s impossible not to miss some things,” said Bartosz Turek, an analyst at Lion’s Bank.
OFEs can, of course, invest in the market indirectly by investing in funds with real estate involvement or in debt securities issued by real estate funds. But direct involvement is prohibited.
According to estimates, Polish pension funds’ indirect investment in real estate may be up to 1-2 percent. But no official statistics are available.


The question is – if permitted, would they be interested? “With 100 percent certainty – yes,” Turek said.
“A new law in force since 2014 allows institutional investors, such as funds, to use the so-called ‘occasional lease,’ which makes leasing residential property much safer for owners,” Turek explained. Occasional lease lets landlords evict tenants that aren’t paying in a matter of 3-4 months instead of years, as used to be the case before.
“This instrument guarantees owners stable returns from residential investments, at 4-5 percent net a year,” Turek said, adding that “residential property is also constantly increasing in value, at 1-2 percentage points above inflation.”

Residential opportunity

a stable investmentThe opportunity that residential real estate offers, however, has not been missed by the government. State-controlled lender BGK is working on establishing an “Apartments for Rent Fund,” which will purchase entire apartment blocks with the purpose of renting them out. Furthermore, the government has said that the fund will look for a secondary investor, which means it wants to sell the fund once its asset portfolio is up and running.
“All that remains then is cutting off the coupons and pension funds would be very interested in that,” Turek said.
Who then will buy the “Apartments for Rent Fund” once it’s up for sale? “Probably another foreign investment fund,” Turek said. Apparently, Polish pensioners are just not meant to benefit from it.


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